Can i be taxed on an inheritance




















With inheritance tax, the tax is levied after the inheritance is divvied up and distributed to beneficiaries. Another key difference is that while inheritance tax is only levied by states, both the federal government and states may collect estate tax. Notably, the only state that currently collects both estate and inheritance taxes is Maryland.

In Maryland, assets can be taxed both before and after distribution. In other states assets will only be taxed before or after distribution, or at neither time.

Inheritance tax only applies if the deceased lived in one of the six states that levy inheritance tax. Even if you live in a state that has an inheritance tax, if the deceased lived in a state that did not have an inheritance tax you will not pay any inheritance tax. The beneficiaries are responsible for paying inheritance tax. For example, your brother dies and leaves you a rental property that belonged to him.

The income from that rental property would be taxable to you just like it was taxable to him. This is because the title of the rental property and all its rights and privileges have been passed to you as his beneficiary. It is no different than if you had gone out and bought the rental property yourself. A step-up in the basis means that the property can be valued at the fair market value on the date that your brother passed away or, alternatively, at a date six months later.

If you inherit stock from another person, it is treated similarly to the rental property example in the previous paragraph. While any income produced from the stock after the owner died would be taxable to the beneficiary, such as dividends, the underlying stock itself is revalued to the fair market value as of the date the original owner passed away. If the beneficiary sells the stock, the calculation of the gain or loss on the stock sale would depend on that new fair market value.

Therefore, if the stock has increased in value since the date of death, the beneficiary would have to recognize a capital gain on the sale of the stock. Likewise, if the value decreased since the date of death, the beneficiary would have a capital loss. What about property or money held by the decedent in a living trust? Living trusts are a popular legal vehicle with which to avoid an expensive probate of an estate.

Many people have these set up to hold their personal residence or other assets. Because a living trust is a disregarded entity for federal tax purposes, any stock, other property, or money held in the living trust is treated as belonging to the decedent before they pass away.

It can also be relevant when items are divided among family members, both to ensure fairness, and avoid claims of de facto sales. From a tax perspective, the great benefit of life insurance is that life insurance proceeds are not counted as taxable income, so beneficiaries do not pay income tax on them. However, if you take your benefits in installments over time rather than in a lump sum, the balance of the account may earn interest over that time, which would be taxable.

With annuities, the situation is different. If an annuity provides for a death benefit, it typically will be treated like life insurance and not be subject to income tax. However, if you receive a survivorship right to a continuing annuity, the annuity payments you receive would likely be subject to income tax, like the other cash receivable mentioned previously.

The assets and legal requirements of a trust also can vary, so communication with the trustee, or with legal and tax counsel if you are the trustee, is key. The good news is inheritance is generally income tax-free. In many cases, there are opportunities to capture; in others, there may be pitfalls to avoid.

Your Fiduciary Trust wealth advisor can help you work through the concerns and make the most out of what you inherit. Important Information All investments involve risks, including possible loss of principal. This communication is intended solely to provide general information. The information and opinions stated are as of October 7, and may change without notice.

The information and opinions do not represent a complete analysis of every material fact. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product.

Please consult your personal advisor to determine whether this information may be appropriate for you. The information presented is not intended to be making value judgments on the preferred outcome of any government decision.

The "tax basis" of an asset is the value that's used to calculate the taxable gain—or loss—when the asset is sold. Usually, the tax basis is the price the owner paid for the asset. But what is your tax basis when you don't buy something, but inherit it? The tax laws say that your tax basis is the value as of the previous owner's date of death. The inheritor's tax basis is called a "stepped-up" basis, because the basis is stepped up from the previous owner's purchase price to the date-of-death value.

And if property is held for a long time, its value generally does go up. But the basis could be stepped down, too, if the property was worth less when the person died than it was when it was bought. What matters is simply the date-of-death market value. Instead of the date of death value, the estate can choose an alternative valuation date of six months after the death. See an estate tax expert if this is an option for you.

A high tax basis is good.



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